Planning Ahead: How the 2025 budget impacts your tax and estate planning

February 6, 2026

Reviewing one’s estate and potential tax liability is always a sensible endeavour, but following the Labour Government’s combined Autumn Budgets of 30 October 2024 which introduced sweeping reforms to the Inheritance Tax regime, including changes affecting agricultural and business assets and, most significantly, the inclusion of pension funds within the taxable estate from 6 April 2027.

This was then followed by the 26 November 2025 budget further amending the Agricultural Property Relief (APR) and Business Property Relief (BPR) landscape for Inheritance Tax (IHT) purposes. This was then further amended following the subsequent changes that came into force on 23 December 2025.

This was then followed by the government’s published consultation on 27 February 2025. This document confirmed extensive updates to the tax code from 6 April 2026, with transitional rules applying from 30 October 2023 to 6 April 2026 (“the transitional period”). Following this publication, the practical impact of the reforms on individuals and trustees is now clearer.

Below is a breakdown of the new allowances and rules governing Business Property Relief (BPR) and Agricultural Property Relief (APR).

Key Changes to APR and BPR from 6 April 2026:

1. Introduction of a new £2.5 million relief allowance

A new £2.5 million combined allowance will apply to assets qualifying for 100% Business Property Relief or Agricultural Property Relief. Property exceeding this value will still qualify for 50% relief rather than the full 100%.

This is a major increase from the previously proposed £1 million cap that was due to take effect, before the government revised the allowance upward following widespread industry feedback.

2. Allowances are now transferrable between spouses

Any unused portion of the £2.5 million allowance can be transferred to a surviving spouse or civil partner, allowing a couple to benefit from up to £5 million at 100% relief. This applies even where the first spouse died before 6 April 2026.

This replaces the earlier position, where the allowance was not going to be transferrable nor apply retroactively to deaths prior to these changes.

3. Seven‑year refreshing cycle

The £2.5 million allowance will refresh every seven years on Potentially Exempt Transfers (PETs), operating similarly to the current nil‑rate band mechanism.

4. Index‑linking from 2031

From 6 April 2031, the £2.5m allowance will be index‑linked to CPI.

5. Treatment of gifts during the transitional period

Gifts of APR/BPR assets made before 30 October 2024 will not reduce the £2.5m allowance for later death or trust calculations. However, during the transitional period, PETs of qualifying assets will count towards the allowance if the donor dies on or after 6 April 2026 and within seven years of the gift.

Where death occurs before 6 April 2026, the cap does not apply and the full relief is available.

6. Transfers into trust before 6 April 2026

Transfers of qualifying assets into trust before 6 April 2026 still benefit from full relief regardless of value, but if the donor dies within seven years and the death occurs on or after 6 April 2026, the value will fall back into the estate and the £2.5m allowance will apply.

(These principles remain unchanged from earlier proposals.)

7. Trusts receive their own £2.5 million allowance

Relevant property trusts will each have a separate £2.5m allowance, refreshing on a 10‑year cycle, with exit charges calculated on the unrelieved values of distributions.

8. Reduction of 100% relief on certain shares to 50%

For business property relief: Shares traded on a recognised exchange but not classed as “listed” (e.g. AIM shares) will qualify for 50% relief, not 100%.

The same applies to qualifying shares on foreign exchanges not recognised by the UK.

9. Ability to pay IHT in interest‑free instalments

Any IHT due on qualifying business or agricultural assets can be paid over 10 years in interest‑free instalments, this extension applies across all APR/BPR‑qualifying assets.

Conclusion

Although the revised £2.5 million cap is significantly more generous than the previously announced £1 million limit, the reforms still mean that many more estates, especially those involving farms or family businesses due to the inherent value in land, may face an IHT liability for the first time.

This will be mitigated by the ability to transfer unused allowances between spouses, along with the reinstated flexibility of 10‑year interest‑free instalments, to provide valuable planning opportunities.

As always, it is essential to seek specialist professional advice when reviewing estate planning arrangements, especially in light of the complex transitional rules and the significant changes coming into force from 6 April 2026, and whatever future Budgets may yet bring.

For further information, or to discuss the issues raised, please contact us to speak to a member of our Private Wealth and Inheritance Team.

Graeme Black
Partner, Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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